What is Net Stable Funding Ratio [NSFR]?

NSFR or Net Stable Funding Ratio is a significant component on Liquidity Standards of the Basel III reforms. The guidelines in this regard finalized by RBI for implementation will come into effect in India from April 1, 2020.

Unlike LCR guidelines which promote short term resilience of a bank’s liquidity profile, the NSFR guidelines ensure reduction in funding risk over a longer time horizon by requiring banks to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress.

NSFR can be defined as the amount of available stable funding (ASF) relative to the amount of required stable funding (RSF).  In the other words, the NSFR of an institution is computed with following formula;

NSFR = ASF÷ RSF ≥ 100

[NSFR= (Available Stable Funding (ASF) ÷ (Required Stable Funding (RSF)]

For stable the stable source of funding NSFR should be equal to at least 100% on an ongoing basis. The NSFR would also be supplemented by supervisory assessment of the stable funding and liquidity risk profile of a bank. On the basis of such assessment, the Reserve Bank of India may require an individual bank to adopt more stringent standards to reflect its funding risk profile and its compliance with the Sound Principles.

The “Available stable funding” (ASF) means the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year. The amount of stable funding (ASF) required is known as RSF (“Required stable funding”). The RSF of a particular institution is a function of the liquidity characteristics and residual maturities of the various assets held by that institution as well as those of its off-balance sheet (OBS) exposures. Additional stable funding sources are also required to support at least a small portion of the potential calls on liquidity arising from OBS commitments and contingent funding obligations.

The amounts of ASF and RSF specified in the BCBS standard are calibrated to reflect the presumed degree of stability of liabilities and liquidity of assets. In determining the appropriate amounts of required stable funding for various assets, the following criteria are taken into consideration, recognizing the potential trade-offs between these criteria viz.(i) Resilient credit creation, (ii) Bank behavior( to roll over a significant proportion of maturing loans to preserve customer relationships) (iii) Asset tenor, & (iv) Asset quality and liquidity value.

NSFR assumes that (a) short-dated assets require a smaller proportion of stable funding because banks would be able to allow some proportion of those assets to mature instead of rolling them over and (b) the unencumbered, high-quality assets that can be securitised or traded, can be readily used as collateral to secure additional funding or sold in the market, do not need to be wholly financed with stable funding.